As IT Spending Changes, EMC Holds Its Ground

Here's how 2012 looked for Hopkinton-based EMC Corp.: For the first three quarters of 2012 — the period covered by financial data released to date — it brought in $9.3 billion in revenue and made a profit of nearly $2 billion. Its share of the disk storage market grew from 32.1 percent in the third quarter of 2011 to 33.6 percent at the same time last year, according to research firm Gartner, while its nearest competitor, IBM, had 11.9 percent.

Yet, in November, investment research firm Zacks downgraded EMC's stock to “underperform.”

Any publicly traded company can run into trouble with investors even if it's doing well, if analysts had been under the impression it would do even better. But for a high-tech company like EMC, the second-largest employer in Central Massachusetts, things are far more complicated. The world of data storage and use, where the company has lived since its 1979 start as a producer of 64-kilobyte memory boards, is in the midst of much-discussed change, as businesses move their data into the cloud. In the shorter term, EMC is also facing questions about companies' willingness to spend money on IT in the face of uncertain economic conditions.

In announcing its downgrade of EMC stock, Zacks predicted “sluggish worldwide IT spending for the next couple of years,” an issue clearly on the minds of EMC and everyone watching it. In the company's earnings call with investors about its Q3 results, CEO Joseph Tucci said its forecast for 2013 “calls for modest growth in the IT market as a whole.”

Edward Parker, an analyst who follows EMC for Lazard Capital Markets, said this year doesn't look great for IT spending.

“All I can tell you right now is that growth rates have come down, that (there was) a lot of fear in the economy around (the) fiscal cliff,” he said last month, before last week's deal to avoid the automatic tax increases and spending cuts that analysts believed would have hurt the national economy. “I think there's not a lot to be excited about.”

But another analyst who covers EMC, Brian Freed of Wunderlich Securities Inc., said 2013 holds promise for IT spending, particularly compared with last year.

“Frankly, the storage market in 2012 was nothing short of awful,” he said. “Overall it grew in the low single digits. Historically, it's been about an 8 percent growth market. EMC certainly outshined the competition in the storage market, but to some extent it's a beautiful house in a terrible neighborhood.”

Freed said 2012 IT spending suffered in part because of external factors, including a flood in Thailand that disrupted production of hard-disk drives. In 2013, he said, technology budgets will depend on overall economic growth, but businesses that have used up their excess storage capacity will have no choice about buying more storage space, even if they don't have big IT budgets in general.

“The beauty of storage as a business is it is a consumable in the world of technology,” he said. “You can choose not to upgrade your PC; you can choose not to upgrade your Exchange application, but most companies still have to store all the emails they get.”

Of course, the way companies store those emails is changing. The data that once sat on EMC machines in corporate server rooms is now increasingly likely to live “in the cloud,” stored in a data center thousands of miles away.

EMC clearly sees the cloud as a big part of its future. Its VMWare subsidiary is the leading company for server virtualization — making one piece of hardware function like multiple individual servers — and it's hard to go very far on the main EMC website without finding references to migrating IT to the cloud, making cloud data more secure or finding better ways to use data in the cloud. In the third-quarter earnings call, Tucci waxed enthusiastic about the possibilities, saying new software “will spark a revolution in the data center market.”

EMC and VMmare also recently launched what they're calling the Pivotal Initiative, a new business unit focused on the use of cloud structures and mobile technology to harness what the IT world refers to as “big data.”

“There's hundreds of terabytes of data sitting on enterprise arrays that really is contributing no value,” said Freed. “The vision of big data is to create applications that can leverage the analysis of your data to drive business value.”

For example, Freed said, a company could have its sales force update databases from the field in real time and make its manufacturing process instantly responsive to the new data.

Parker's interpretation of the Pivotal Initiative is less positive. He said Greenplum, a company focused on “big data” that EMC acquired in 2010, appears not to have performed as well as expected financially, despite its good technology, and the company may restructure things to keep those results from hurting the company as a whole.

“They need to rethink everything,” he said, “Sort of gather the troops back to the drawing board.”

Parker also has reservations about EMC's long-term cloud prospects as more companies eventually move to “public clouds,” where servers are owned by a third party and shared among clients, something that could turn storage into more of a commodity and drive prices down. For now, though, he said the bigger trend is private clouds, in which companies remain responsible for their own IT infrastructure, and Parker said that's a field that has a lot of promise for EMC. He said the company has well-respected hardware and software to serve businesses that want to build their own secure, flexible private clouds. At least for now, he said, that strong brand name means a lot.

“They have the deepest and broadest product portfolio in the storage market,” he said.

EMC Chief Puts Off Retirement

EMC Sees Q3 Gains, But Cuts Sales Outlook

EMC's RSA Gets Illinois Deal

EMC Acquires Fraud Detection, Security Vendor

EMC’s Higher Ed IT Program Reaches 1,000 Schools

EMC Posts Record Year, Q4